State hits jackpot with Indian casino revenue growth

Revenue and the number of slot machines grew at California's Indian casinos over the past two years, but not nearly as fast as the payments the state government received from gaming, a new study confirms.

Gaming revenue at tribal casinos in California rose 31 percent from 2004 to 2006 to reach $7.7 billion, while the number of slot machines increased 9 percent to 62,732 over the same period. But the same two years saw the state's share of Indian gaming revenue soar by 133 percent, from $116.9 million in 2004 to $270.7 million last year.

The increase is largely a result of tougher negotiations by the state with the tribes over compacts that govern the casinos. The two largest casinos in the Sacramento region -- Thunder Valley Casino and Cache Creek Casino Resort -- each inked new compacts in 2004 that allowed them to add slot machines if they paid the state an annual fee for each one, starting at $11,000 and with the amount climbing as the number of machines increases.

The state is starting to see the proceeds of those tougher deals, but the tribes that signed them might be rethinking the value of new slot machines.

Thunder Valley has 2,700 machines, and the plans announced for a huge expansion include no new machines.

"The more machines you have, the more you have to pay to the state, so at some point you have to wonder whether it is worth it to add any," said Doug Elmets, spokesman for Thunder Valley.

Cache Creek went from 1,700 slot machines in late summer 2004 to 3,130 now, said spokeswoman Wendy Waldorf. In its new expansion, Cache Creek plans to add 390 machines, said general manager Randy Takemoto. He doesn't plan to go over about 3,500 slot machines because of the diminishing returns.

Other tribes appear to have changed their own negotiating strategies with the state to avoid the high-fee deals.

Gov. Arnold Schwarzenegger on Tuesday signed legislation allowing four Southern California tribes to add as many as 17,000 slot machines altogether, but the new deal provides payments to the state based on a percentage of what each machine makes rather than an annual fee. The state would get 15 percent of the net win of the first 3,000 machines and 25 percent of any additional machine.

"That is going to change everything," said Alison Harvey, executive director of the California Tribal Business Alliance. "They can flood the floor with machines without worrying whether they get used."

Tribes with 2004 compacts have little incentive to put a lot of new machines on the gaming floor.

"That steeply stepped model dictates caution as a business model," she said. "If you put it on the floor, you are paying for it. It doesn't matter if it's paying for itself or not."

Tops in the nation

California accounts for about $3 of every $10 in U.S. Indian gaming revenue, tops in the nation, according to the annual Casino City's Indian Gaming Industry Report, conducted by Analysis Group Inc. of Boston and released last month.

Gaming revenue at California Indian casinos was $7.7 billion in 2006, up 31 percent from $5.9 billion in 2004. The next nearest competitor is Connecticut, with $2.5 billion. Revenue was up about 27 percent nationwide for the same period.

Nationwide, states with tribal gaming collected more than $1 billion from gaming, a 35 percent increase over two years ago, but the sharp increase in California accounted for about half of that rise.

California tribes paid state and local governments $308.5 million in revenue sharing in 2006, up 100 percent from tribal revenue sharing of $153.2 million in 2004. The vast majority of that increase went to the state. Revenue sharing with local governments hardly grew at all, rising from $36.3 million in 2004 to $37.8 million in 2006.

"The rise in revenue sharing is a sign of the newer compacts," said Alan Meister, economist and manager of the Los Angeles office of Analysis Group. Meister is author of the study, commissioned by Casino City Press of Newton, Mass.

California had been the growth leader in casino revenue for several years, but it was outpaced by nine states in 2006. Growth here slowed as various legal issues and compact negotiations were getting resolved, Meister said.

Cash from compacts

Both tribes with casinos in Greater Sacramento revised their compacts in 2004, and the tribes added more slots over time. The state gets more from the newly added machines on a sliding scale.

Thunder Valley Casino opened in June 2003 with 1,906 slot machines and 100 table games. It has been adding more slots since.

It negotiated a new compact with the governor in the summer of 2004 for the right to add more machines in return for a higher payment to the state. For its first 2,000 slots, the tribe pays the state $11,000 per machine per year. For the next 500 machines, the payment rises to $12,000 per machine per year. The scale increases to $13,250 per machine per year for the next 500 machines. The scale tops out at $25,000 per year for each machine over 4,500 slot machines.

Cache Creek also negotiated a revised compact in 2004.

Most tribes in California operate under 1999 compacts with the state, which directed money into two funds, one of them a trust fund for tribes without gaming.

The new compacts ratified this year should start to show up in California's numbers within two years.

Indian gaming is often painted with a broad brush, but it is inherently very fragmented. There are 228 tribes in 28 states that operate 423 gaming venues, which can vary from bingo operations to high-end resort casinos. Even tribal operations in the same state may have completely different business plans and state compacts.

But virtually all are growing. Of the 28 states that have tribal gaming, 27 experienced revenue growth during 2006. The only decline was in Louisiana, where casinos dealt with decreased tourism as part of the lingering effects of Hurricane Katrina.